菲利普莫里斯國際 (PM) 2009 Q3 法說會逐字稿

Good day and welcome to the Philip Morris International third-quarter 2009 earnings conference call.

Today's call is scheduled to last about one hour, including remarks by Philip Morris International management and the question-and-answer session.

(Operator Instructions).

I will now turn the call over to Mr.

Nick Rolli, Vice President of Investor Relations and Financial Communications.

Please go ahead, sir.

Welcome.

Thank you for joining us.

Earlier today, we issued a press release containing detailed information on our 2009 third-quarter results.

You may access the release on our website at www.PMINTL.com.

As we take you through our call today, we will be talking about results in the third quarter of 2009 and comparing them with the same period in 2008, unless specified otherwise.

References to volumes are for PMI's shipments.

Industry volume and share data is sourced from ACNielsen, other third-party sources, and internal estimates.

Organic volume refers to volume, excluding acquisitions.

Net revenue data exclude excise taxes.

You will find data tables showing how we made adjustments to revenues and operating companies income, or OCI, for currency and acquisitions, adjustments to earnings per share, as well as other reconciliations to U.S.

GAAP measures, at the end of today's webcast slides, which are posted on our website.

Today's remarks contain forward-looking statements and projections of future results, and I direct your attention to the forward-looking and cautionary statements' disclosure in today's presentation and news release for a review of the various factors that could cause actual results to differ materially from projections.

It's now my pleasure to introduce Hermann Waldemer, Chief Financial Officer.

Hermann.

Welcome to our third-quarter earnings call.

In spite of the impact of the global economic recession, I am pleased to announce that PMI has achieved very strong third-quarter results that confirm our Company's ability to grow profitability even in these difficult times.

We have achieved excellent financial results in the quarter, thanks to our strong pricing initiatives, with net revenues excluding currency, up 6.9% and excluding currency and acquisitions, up 4.1%.

Adjusted operating companies income, or OCI, excluding currency, up 13.7% and excluding currency and acquisitions, up 10.6%.

And adjusted diluted EPS, excluding currency, up 18.3%.

While we expect volume in 2009 to fall below last year's level, the 4% organic decline in the quarter was amplified by specific circumstances in a few markets.

Therefore, our year-to-date organic volume decline of 2.1% better reflects our anticipated full-year volume performance.

On a year-to-date basis through the end of September, we have achieved a 4.7% increase in net revenues, excluding currency and acquisitions; an 8.6% increase in adjusted OCI, excluding currency and acquisitions; and a 15.4% increase in adjusted diluted EPS, excluding currency.

This chart shows that in 2009 we have delivered consistently against our mid- to long-term currency move to our financial targets in spite of recession-driven weaker volumes, thus demonstrating our ability to generate strong results even in the most turbulent of economic times.

We are today revising our EPS guidance for the full year 2009 to a level of $3.20 to $3.25.

Compared to our previous guidance of $3.10 to $3.20, this represents both an increase in our guidance and a narrowing of the range.

The improved narrow guidance reflects the continued strength of our underlying business and a more favorable currency environment.

We expect the currency impact to be neutral in the fourth quarter of this year and, at current exchange rates, it would be a tailwind in 2010.

However, we will continue to focus on our constant-currency growth rates, as PMI will continue to manage its business in the long-term interests of its shareholders.

A key driver of our improved profitability in 2009 has been our ability to successfully increase prices across nearly all our major markets, while safeguarding our competitive position.

I would like to emphasize again that our pricing decisions are established on a market-by-market basis, taking into account the competitive environment, consumer affordability, and the fiscal and economic situation.

We are confident that our price increases are sustainable, and we will continue to balance revenue growth with volume growth going forward as, at the end of the day, shareholders are interested in earnings per share rather than cigarettes per share.

Boosted by recent price increases in Germany and Spain, our pricing variance was $590 million in the third quarter for a total year-to-date variance of $1.5 billion.

Even though we increased prices this year at a somewhat faster rate than previously, consumer behavior has remained resilient during this recession.

Consumer down-trading, which was a major concern of investors in the first half of the year, has remained a globally-manageable phenomenon.

It has had a substantial impact in three of our key markets that have been particularly affected by the economic crisis, namely Russia, Spain, and Ukraine.

The situation in the latter has been severely exacerbated by very large excise tax increases.

Positive trends have, however, continued in other emerging markets, such as Argentina, Indonesia, and Mexico.

In most markets, the key economic component that tends to impact consumer behavior is unemployment, and in particular, any sharp increases thereof.

In this context, the consumer down-trading in Spain was, therefore, no surprise, as unemployment has climbed to above 18% nationally and to 25% in the south of the country.

With the exception of Brazil and Ukraine, nearly all governments across the world have treated excise taxes so far in 2009 in a rational manner.

And they have benefited from the positive impact on excise tax yields of higher retail prices.

We remain optimistic that such a rational approach will generally prevail as governments prepare their budget plans for 2010.

Although we do expect some VAT increases in addition to excise tax increases, as governments seek to boost their revenues, we believe that these should be globally manageable.

Let me now highlight our performance in some of our key markets.

As I mentioned earlier, the magnitude of the organic volume decline in the quarter can be attributed to exceptional factors, with nearly two-thirds of the decline coming from three markets, Ukraine, Spain, and Pakistan.

In Ukraine, the massive excise tax increase in May this year, which led to retail price increases that month alone of 22% to 50% on PMI brands, resulted in a severe market disruption, and our shipments were down by 23% in the quarter, broadly in line with the total market contraction.

While our share declined slightly in June due to the greater availability of [old] price competitive products in the market, it has since recovered to reach 35.6% in the third quarter, 0.1 share points above last year's level.

In Spain, the total cigarette market was down an estimated 10.2% in the quarter, due to the recession and higher retail prices, exacerbated by weak tourism.

Our shipments declined by 23.5%, due to unfavorable distributor inventory movements as well as the overall market decline.

Our market share in the quarter was off just 0.2 points, to 32.1%, with gains for L&M nearly completely offsetting the decline of Marlboro and Chesterfield.

The 16.1% shipment volume decline in Pakistan is attributable to trade inventory movements subsequent to the excise tax increase of June 2009.

In Russia, the total market, which grew at an estimated rate of some 4% in 2008, is declining at an estimated 3% to 4% this year, reflecting the economic downturn and the departure of an estimated 2 million migrant workers.

In the third quarter, PMI's shipments were down just 0.8%.

Our market share was, however, up 0.6 points in the third quarter, to reach 25.6%.

This strong performance is attributable to the growth of Bond Street in the value and optimizing the low price segment, the resilience of Parliament, and the overall strength and range of our brand portfolio.

In Indonesia, market growth is trending at 3% to 4% this year, compared to an estimated 10% last year, even though the Indonesian economy has suffered less than others from the global economic downturn.

Due to the timing of Ramadan this year, PMI's shipments were down 1.1% in the quarter.

PMI's key brand, A-Mild, continued to grow share and was up 0.5 share points in July/August to 10.7%, while Marlboro share was also higher.

Excluding currency, our OCI increased in Indonesia at a double-digit rate in the quarter.

Marlboro continued to perform strongly in Japan in the third quarter, gaining 0.4 share points to 10.6% behind the success of Marlboro Black Menthol and Marlboro Filter Plus.

During the quarter, we rolled out Lark Mint Splash nationally.

Along with the previously-launched Lark Classic Mild, this new launch has helped to stabilize the market share of the Lark family at 6.6% in the quarter.

These innovative new products from Marlboro and Lark have helped consolidate our leadership in the growing menthol segment, which was up 1.1 share points to 23.2% in a total market that was down 3% in the quarter.

With respect to the intentions of the new government in Japan as to the future of the tobacco sector, there is at this stage much speculation, but nothing concrete.

We expect clarification of their plans early next year.

We continue to advocate regular moderate excise tax increases, combined with manufacturers' pricing freedom.

The highlight of our strong quarter in Asia was Korea.

Our shipments increased by 21.4%, and we gained 2.4 share points to a record quarterly level of 14.6%, due mainly to the continued strong performance of Marlboro and Parliament.

I will now turn to our improved results in the European Union region.

Adjusted OCI, excluding currency and acquisitions, increased by 5.3% in the third quarter, helped by price increases in Germany and Spain that more than offset negative volume and mix.

On a constant-currency basis, our adjusted OCI margin grew by 2.2 points to 52.2%.

Our market share was down slightly, by 0.2 points, at 38.9%, due to a weaker performance of Marlboro in France, Germany, and Spain.

However, we are continuing to strengthen our second pillar in the EU region, L&M, already the region's second best-selling brand, gaining 0.9 share points to reach a 5.7% regional share behind strong performances, notably in Germany, Poland, and Spain.

We are optimistic that the rollout in the EU region of our innovation pipeline behind Marlboro will start to bear fruit next year.

We are very pleased by the strong performance of Marlboro in Italy.

We succeeded in growing the market share of Marlboro during the third quarter from 22.6% last year to 23.1% this year, and thus stabilized our overall market share at 54.5%.

This achievement was made possible by the successful launch of Marlboro Gold Touch, a new innovative offering in an unprecedented cigarette format, designed with a slightly slimmer diameter to provide a smooth taste and comfort in the hand.

Marlboro Gold Touch achieved a 1.4% market share in Italy in the third quarter, and continues to grow.

On a global basis, we have continued to benefit from the strength of our overall portfolio.

Where down-trading has occurred, we have generally been successful in keeping our consumer base, thanks to our range of strong value, international, and local heritage brands.

Our best-performing international brands in this recessionary environment have been Bond Street, particularly in Russia, and Lark, particularly in Turkey, which are in the lower-price categories.

In the premium segment, the rate of decline in the shipment of Parliament and Marlboro during the third quarter was in line with our overall organic volume trend.

Both brands achieved volume growth in the quarter in Asia, primarily driven by their strong performance in Korea, and they have been gaining share in the premium segment in most key markets.

We have continued to invest strongly behind our key brands, increasing the level of our spending this year in the EU region behind Marlboro.

The new architecture for Marlboro is being successfully deployed in two steps.

We are strengthening the core Red and Gold variants, through an upgrade of the Red tag, so far available in Austria, France, and Italy, and the modernization of the Gold pack, now available in 26 countries.

Consumer perception of the new Gold packaging is very positive.

The second aspect of the rollout of the Marlboro architecture is the development and launch of innovative line extensions appropriate for each family and in line with adult consumer preferences.

These new products have not been deployed globally, but rather we have focused on one or two of them per market, establishing priorities on a country-by-country basis in line with our enhanced consumer understanding and engagements.

In total, we have launched Red line extensions in 34 markets, Gold line extensions in 17 markets, and fresh line extensions in 33 markets.

Let me give you some examples, however, of our successful, innovative Marlboro line extensions.

Marlboro Filter and Flavor Plus have an innovative four-channel filter that includes a tobacco plug intended to enhance the flavor experience in the low tar cigarette, and is sold in an innovative sliding pack.

Marlboro Filter and Flavor Plus is available in 6, 3, and 1 mg variants.

In July/August this year, Marlboro Filter Plus notably achieved a 2.4% share in Romania, 2.3% in Kuwait, 1.8% in Paraguay, and 1.3% in Kazakhstan.

Under the Marlboro Gold umbrella, we have launched a range of different line extensions.

Marlboro Gold Advanced is a smoother-tasting, full-flavor product in a very elegant anthracite pack.

This variant is now available in four markets and achieved a promising 0.3% national share in France and Portugal in September, following its launch in June and July, respectively.

Marlboro Gold Touch is available in eight markets in addition to Italy.

In Greece, based on the end market sales data, Marlboro Gold Touch already had a 0.5% market share in September, and initial consumer research learning in July showed that over 40% of the early adopters were legal age, minimum 18- to 24-year-old, smokers.

Marlboro Gold Edge is a super-slims variant that is sold mainly in Central and Eastern Europe.

During the third quarter, it achieved a 3.4% share of the fast-growing superslims segment in Poland and a 4.8 segment share in Hungary, and is performing well in duty-free areas.

Marlboro Gold Smooth 1 mg has been launched in the Middle East.

In August, it achieved market shares of 0.7% in Kuwait, 0.5% in the UAE, and 0.3% in Saudi Arabia.

In the Marlboro Fresh family, our most successful innovation has been Marlboro Black Menthol, with its refreshing high menthol content and attractive pack.

In the third quarter this year, Marlboro Black Menthol obtained a 1.4% market share in Japan and a 3.3% market share in Hong Kong.

Marlboro Black Menthol has also been launched this year in Indonesia, Malaysia, and the Philippines.

Our latest innovative line extension is Marlboro super premium.

The cigarette is made using top-grade, flue-cured, and Burley tobaccos.

The distinctive pack with its red metallic interior was designed by Pininfarina, the world famous Italian designer of cars, notably Ferrari models.

Marlboro super premium was launched in the exclusive setting of the Singapore Formula One Grand Prix last month.

Our strength in the premium segment underpins our profitability and positions us very well to further grow profitably as the world economy gradually moves out of the recession, during which our cash flow has remained formidable.

In the third quarter, our free cash flow totaled $1.7 billion, and year to date it has reached $5.9 billion.

Excluding the impact of currency on net earnings, free cash flow was 17% higher in the quarter and 12.4% higher in 2009 through the end of September.

Our commitment to enhance shareholder returns remains as strong as ever.

Reflecting the strength of our underlying business meeting, we increased our quarterly dividend in September by 7.4% to a level of $0.58 per share.

At our current stock price of $50.82 per share, this represents an attractive yield of 4.6%.

We have continued to steadily implement our share repurchase program, spending a further $1.5 billion in the third quarter to buy back an additional 31.5 million shares.

We now have a $3.4 billion remaining in our $13 billion program, which runs through the end of April next year.

In 2009, we have so far returned a total of $7.4 billion to our shareholders through dividends and share repurchases.

Since we've spun off in March 2008, the number rises to $15 billion, representing more than 15% of our current market cap.

Our financial strength is a key component of our success in the current difficult economic environment.

It is reinforced by our excellent business momentum.

The third quarter has illustrated again our ability to deliver against all our currency-neutral financial targets.

While volumes remain weaker than last year, we have more than offset this by higher prices, strong performances in most key markets, the continued benefits of our productivity and cost-saving programs, and we have intensified our efforts to optimize working capital levels.

Today, we have raised our 2009 EPS guidance for 2009 to $3.20 to $3.25, representing an increase of 12% to 14% compared to 2008 on a currency-neutral basis.

Thank you for your interest in our Company.

I will now be happy to take your questions.

(Operator Instructions).

Judy Hong, Goldman Sachs.

Hermann, just as we think about 2010 and think about volume outlook, I was hoping to just get your perspective on volume outlook.

You said year to date, it's down about 2.1% organic.

As you start to lap some of the challenges that you faced this year, and then the macros start to get better globally, do you start to see -- would you expect to see volume sort of start to turn positive as 2010 progresses?

Okay, well, let me start really with putting it into the perspective.

I mean, a 2%, minus 2% organic volume, I believe, is an excellent performance for a consumer goods company in a recession.

Looking forward, that's the key of your question here, is, look, I would say I expect some improvement in 2010 over 2009, but I would say at this point in time impossible to quantify.

There are a number of factors that influence that situation.

Of course, the first and most important one is the general question about economic recovery, and also recovery in terms of employment, i.e., a rebound of the stock markets doesn't mean yet new jobs for the people.

There will be a certain lag to that.

So that is, of course, one thing.

I mean, in key markets, like Russia, I personally would think that could come or start to begin to improve in the second quarter of 2010 -- second half, I'm sorry, of 2010.

Then, of course, it gets to the next question on really total market size development of major markets.

Look at Russia last year, and it is a huge market.

It was last year about $400 billion.

A year ago, was growing 4%.

This year, it's declining 3% to 4%.

Is it going to stabilize or even already a return to growth?

That is a key question with major impact on the total volume number.

Indonesia is a 250 billion cigarettes market.

That market has been growing last year about 10%.

Now it's growing 3% to 4%.

The growth of next year is going to be important.

And yes, of course, there is another important market, being Japan, also in the range of 250 billion cigarettes.

They are -- a lot will also depend on the new governmental policy on excise tax, and I guess we all would love to accept a certain market decline in Japan in exchange for pricing freedom.

So all in all, it will depend on those key points.

We will continue to strike the right balance between price, earnings, and volume.

And then, just following up on the Indonesia.

You said industries growing 3% to 4%.

I think you said your volume was down, but there was a timing of the Ramadan holiday.

So can you quantify how much the timing impacted your volume in the third quarter?

And then, just broadly speaking, can you talk about some of the factors that may be impacting slower growth for the industry in that market this year versus last year?

The Ramadan impact, I would estimate, and this is just a shift quarter to quarter, anything around 1 billion cigarettes probably is a good estimate there.

In terms of overall growth of the market, that will, of course, depend here again on economic recovery.

Indonesia as a country, in any case, is doing much better than many others.

The main thing for Indonesia that I also would like to highlight is that the growth of that market today is actually in the very low price category of that market, and that one -- that growth is driven by a tax loophole in that market.

As you will recall, there is a three-tier excise tax system in the market.

The lowest tier, called Tier 3, goes for volumes of a brand of up to $0.5 billion, and it's specifically for hand-rolled cigarettes.

That's, of course, perfectly justified for employment reasons, but then there is a second tier that is valid between $0.5 billion and $2 billion that actually also includes machine-made cigarettes, and there is the abuse of the legal loophole in particular by one big competitor in there, so you just have new legal entities then fall under this category, and all the rest then is just taxed normally.

So that's something we are working on that should be addressed going forward.

That's the one and only reason, actually, why we show some market-share loss in that market.

It's only due to that segment.

Otherwise, we are doing really well in Indonesia.

Jon Fell, Deutsche Bank.

I just wanted to follow on the volume question first of all, a little bit.

I mean, Hermann, you said yourself that investors in the market are interested in earnings per share rather than cigarettes per share.

Do you think that maybe your 1% to 2% long-term growth target for volumes is maybe a little bit aggressive in this environment?

I think price mix in the last quarter was 8%.

At what point would you start to get worried that you're maybe asking the consumer for a little bit too much?

Well, first of all, I mean, on the overall volume targets, 1% is our organic volume growth target.

2% would include acquisitions.

The 1% organic volume targets, we have met it this year.

As I -- last year.

We will not meet it this year.

And it probably would be unrealistic to assume that we already go back to 1% organic growth next year.

But these are mid- to long-term targets, and as I said at the beginning, we have achieved it -- last year.

I think we again can achieve it going forward.

I see no reason to change it.

But I mentioned previously, it also will depend really on the overall market growth trends of some of the really major, major markets, which are Russia, Indonesia, and Japan.

On the second part of your question, look, I am convinced that we are striking the right balance and, as you know, we really manage always for the long term and not for the short term.

Look at this year's year-to-date pricing variance.

It is actually 2.5 times the negative volume mix that we had on a year-to-date basis.

I think that one is the strongest argument.

The second argument, I think, is that we kept our competitive position.

We are very strong and have remained very strong.

The third one is that sometimes price increases also can avoid excise increases.

Through the ad valorem part, governments make more money.

And the last point is that excise tax structures around the world have improved a lot.

Minimum excise taxes, higher specific elements, you name it.

There is some progress there everywhere around the world, and if you go to the top 25 markets around the world, such protection is in place in one form or the other in every one of them.

Actually, in that context, I probably should mention that this morning, European time, the advocate general has come out with her opinion on the pending case on minimum reference prices in the European Union.

Her opinion is a negative opinion, and of course, this opinion carries some weight.

However, I'd like to stress that the member states involved in these cases have also voiced their opinion, supported by what I would consider to be very strong arguments.

So finally, it will be the European Court of Justice who decides about that in about -- three to six months is probably a realistic timing.

I'd like to add that, for me, it's kind of hard to understand why the principle of free circulation of goods, which is -- anyway, I would say, an illusion when it comes to cigarettes in the European Union, labeling requirements, excise tax stamps, you know all that, why such a principle would override the public health concerns that have been brought forward by those member states.

That being said, we just said that there are other means which are being used by governments around the world, and it's actually interesting that the EU commission then sells, acknowledges, that these tools might need to be further reinforced.

Just one example there could be that the minimum tax, which today in the EU is capped at 100% of the tax on the most popular price category, eventually could go above and beyond those 100%.

So, I wanted to use that question also to provide recent information to everyone.

Thank you, Hermann.

Can I just follow on from that, and ask you to remind us which markets currently have minimum reference prices in place at the moment?

So, and are there any of those markets where you are worried that alternative tools, such as existing minimum excise tax requirements, couldn't be used to achieve pretty much the same thing?

The countries concerned by the case are Ireland, France, and Austria.

A fourth country that has a minimum reference price is Italy.

I believe that all those countries, if the final decision -- and that we don't know yet, let's wait for the decision of the European Court of Justice -- would be negative, I think they would address it in the sense we were discussing earlier, well, you have to see that that is simply, then, a burden on the low price end of the price segment and not on the premium price segment, actually.

David Adelman, Morgan Stanley.

Just to clarify what you were saying to Jon, if you couldn't have minimum reference pricing in Europe, governments could elect under their existing authority to essentially achieve the same impact on cigarette pricing architecture through the utilization of minimum tax levels, correct?

It is a question that depends on country to country.

You can go under today's law.

You can go up to 100% of minimum tax of the most popular price category in that market.

That category, of course, varies from market to market.

There can be actually the premium price in a specific market, so it depends.

New rules eventually could foresee that that goes beyond that 100%, and the other element -- there is, of course, available today is a higher specific component in the overall excise tax mix.

Okay.

Secondly, Hermann, do you -- and I realize this is a forward-looking question, but at current exchange rates, do you think something like $4.00 in earnings as a stretch next year is feasible?

We haven't put our budget and plans yet together for the next year.

I think I have to beg your patience for the 2010 guidance until we publish the full year earnings, which would be February 11, 2010.

And then, Hermann, what's the early read -- and I know that you have a competitor that had a fair level of inventory of 17-packs, but what's the early read on consumption trend in Germany subsequent to the fairly substantial increase in per-stick pricing in the middle of the year?

It is -- there are two things here -- 17-packs which are on the new price and 17-packs that will still be available on the old price.

On the new price, this is just a face-value advantage and not a real advantage.

There is some advantage, but I wouldn't say it's huge in the German environment, where -- while the vending pack contents, smokers are still used somewhat to differing pack contents.

So I think you have in the German market for now, and on Marlboro, you have some impact of the price increase, but that is a temporary phenomenon.

We will have to see what the fourth quarter is going to show to us.

But it is important that we have that minimum pack-count change actually in the German market to 19s, and I'm glad that this has been achieved.

And then, Hermann, lastly, what's the status of your request to increase pricing in France?

The status in France right now is -- you are right.

We have sent a price list to the Germans -- to the French government for homologation.

That homologation is still pending.

There might be implicitly some link, of course, to the announced publication of President Sarkozhy's anticancer plan.

I would expect, and that's the public information, that that plan might be announced any time from here to the mid of November.

I don't want to speculate on the contents of that plan.

We will have to wait for the announcement.

However, I would say that over the last couple of years, the French government has been pretty rational and pragmatic and efficient when it comes to cigarette taxation.

So I don't expect any catastrophes at that end.

Christine Farkas, BAS-ML.

Good morning, Hermann.

A question on pricing, if I could.

We saw eight points of positive pricing in the third quarter, similar to the second quarter.

Given the timing of price hikes earlier in the year and what you might see in the fourth quarter, perhaps what we are lapping, is this an achievable growth in the fourth quarter as well for pricing?

Well, forward-looking pricing, you know that I won't do that.

But look, I mean we had strong pricing this year at a somewhat faster pace than we had last year.

Our expectations, I would say, are of course lumped in and part of our assumption for the full-year guidance, which, as you have seen, was narrowed and raised.

So it's all worked into that number.

On that point, Hermann, the guidance then, which was narrowed and raised, could you quantify at all how much you would save coming from the improved FX outlook versus pricing and the stronger-than-expected third quarter?

Yes, that I can.

Look, we had in the previous guidance, we had in there $0.55 negative currency assumption, remember, down from at the very beginning of the year $0.80.

Now our year-to-date September negative currency is actually $0.52, and I don't expect further negative currency in the fourth quarter.

Great.

And then, moving to Marlboro or EU in general, we saw now the third consecutive quarter of share losses, despite some improvement in the underlying markets.

I'm just wondering if you could comment a little bit on Marlboro's performance or your expectations or perhaps the year-over-year challenges, and when do you think that trade-down might stabilize for you in the EU?

Look, I mean, in general I will talk about the EU markets in particular, but in general, I mean the first thing is, of course, that would the Marlboro volume be stronger if there were no recession out there in the world?

Of course.

Being in the premium segment has a certain consequence.

But that's the way it is.

Going forward, this is going to change.

And when this is going to change, we will have (technical difficulty) Marlboro for up-trading to come back.

And remind you, we were discussing pricing earlier, that up-trading will come at higher margins than ever.

I mean, the innovation is out there.

It's working.

It will provide future benefits.

You had the examples in the prepared remarks, and there are plenty of examples around the world where Marlboro is very strong and is growing.

And that is in places like Korea, Argentina, Brazil, Philippines, Japan.

But also, in markets in Europe like Portugal or Italy.

And Italy, I would say, is maybe a little bit comparable to what you see for the moment also in Germany after the last price increase in Italy.

Marlboro, for a couple of months or for two quarters, was weaker because it had to absorb the price increase, and now it's back on track and growing.

So really, I think the share decline in Marlboro is attributable to the price increase.

We hadn't had one for a while in Germany.

I'm convinced it nevertheless was the right decision.

In Spain, the share decline is the simple consequence of a severe recession.

The country really is in deep trouble overall.

Russia, yes, we see down-trading but there, you know that it's from a small base.

And in France, quite frankly, it is right now the difficult price-point situation.

You have major brands still at $4.80.

Marlboro is at $5.30.

That is a temporary disadvantage that Marlboro is suffering from in France, but that won't be forever.

So, (multiple speakers) I -- in all, I think we're doing the right thing.

We keep on going, we keep on strengthening the brand.

We even have increased the investment behind Marlboro in the European Union in this year.

It will pay off going forward.

Thanks for that, Hermann.

And my final question on Canada.

We saw organic growth this quarter, which reversed declines in the first half, if I'm not mistaken.

I know there is some regulatory factors helping.

Is that really what's going on there?

Were there easier comps?

Can you talk about where the growth is coming from, perhaps high-end, low-end, and whether the government support is really what's driving that turn?

Well, yes, we are growing share.

First of all, in that market, 0.3 in share to 33.9% in Q3, so we are doing competitively really well.

But very important is actually that the total tax paid market in the third quarter is up about 6% in Canada.

What is happening there is that you do see increased enforcement, or literally more police cars controlling people coming out of the Indian reservations, or along the Indian reservations, i.e., checking if there are illegal products being bought.

That helps.

That's a good development.

It's very positive.

However, I have to add that in order to have a sustainable improvement in Canada, the enforcement then really would have to go to the roots of the problem, and the roots of the problem are well known.

They are factories in the Indian reservations there.

So the place is known; the ones who run them are known.

This is where I would hope that the next stage of enforcement would go.

So it's positive news for the quarter.

I hope they keep it up, but I hope even more that finally the underlying problem will be tackled.

Adam Spielman, Citigroup.

Thank you very much.

Can I ask you just a factual question?

What the market share was for Marlboro in the EU in the quarter, and what it was in the second quarter as well?

Because I don't think that's in the press release.

I know many things by heart.

This one, I don't know by heart, but I can give you a couple of markets.

I wouldn't know the way to (multiple speakers)

Okay.

Well, well, well, let's go (multiple speakers)

France is down about 0.9%.

I believe Germany was down 1.2%.

Spain is also down in a similar range.

These are the markets that are really down.

Italy, we already told you, is up.

Portugal is up.

Poland in the quarter is actually up 1.7 share points to 9.5 percentage points.

Hungary is also up.

So therefore, really, and I believe that's, of course, the core of your question, there is no generalized Marlboro problem in the EU.

There are specific reasons in France, Germany, and Spain that I explained just in the question before.

But as you can see, that there are also a number of markets with positive news.

There are also a number of markets where the young adult smokers' share, i.e., between 18- and 24-year-olds, is growing.

It's actually, for example, steeply growing in Portugal.

It comes back to the point here that I really believe we are doing the right thing for Marlboro, and at the same time I'm happy that I'm also able to say that we are making big progress in establishing a very solid second leg in the European Union.

And our name is already number two brand in the EU today.

Can I move on?

Thank you very much for that answer.

One question about buybacks and one about Mexico.

Very quickly, the buyback figure, $1.5 billion if I remember rightly, is a step up from your previous $1.4 billion.

Should we assume that $1.5 billion is the sort of quarterly rate going forward?

No, there is no change to what we said earlier.

You should expect, for the full year of 2009, a dollar amount that is very similar to the amount that we have spent last year, and last year's amount was in total $5.4 billion.

Can I quickly, then, turn to Mexico?

Final question.

Your major competitor there has says that it believes it has changed the competitive dynamics very substantially through, I suppose, innovation and, from their point of view, better distribution.

And I was wondering on how you would see the trends in that market in your outlook, particularly given you've been so successful there in the past.

Well, I would rely, then, rather on our distribution than of one of our competitors there, and I guess the best argument is that our share is up 0.9% to 69.4% in the Mexican market.

A couple of words, I mean what's really happening in the Mexican market is that really you have essentially a polarizing market where -- with a very strong premium segment.

This is where we are with Marlboro and Benson & Hedges.

Marlboro is 48% market share, and Marlboro and Benson & Hedges together have a premium segment share of about 83%.

And then, the music for the rest of it is actually in the low-priced segment, where we are being extremely successful with Delicato's growing very nicely there as well.

Our segment share in this growing segment, it's actually growing to 25% of the market now.

Our segment share in there is now also 60%.

Really the segment that is in the squeeze is the mid-priced segment.

I believe that's the real dynamic in that market.

So it would be wrong to say that it's become harder for you to compete in that market?

That would just be a wrong conclusion?

We always enjoy healthy competition.

But as I said, look at our market shares.

I think we are doing well.

We will continue to take the competitive situation very serious and we will continue to compete as good as we can.

(Operator Instructions).

Chris Growe, Stifel Nicolaus.

I just had a couple of questions for you.

First of all, I didn't get this from earlier in the call, but I noticed that in most of your -- or a lot of your major markets, you cited inventory distortions, distributor movements, that kind of thing, and it looks to be overall to have been a burden to your volume.

And I'm sure that's a reality of the economic environment we are in.

But can you quantify or give us a sense of how much that hurt your volume in the quarter?

No, I wouldn't say that it's in most of our important markets.

I've given a couple of specific examples.

That was Spain; that was then the shift in Indonesia.

I would rather say, you know, in general, and this is not huge numbers, but if you are in an environment where also eventually here and there your customers, i.e., your wholesalers or even your retailers are in a working capital squeeze, then I think as a manufacturer, as Philip Morris, we are better served to help the trade by lowering the inventory levels at the trade, compared to a situation where I would keep up those levels and increase payment terms.

To do the second thing would be wrong.

In that scenario, we have chosen rather the first one, i.e., help the wholesaler with their own working capital squeeze there.

So yes, there were some effects there, but it's not a worldwide serious phenomenon.

Okay, I understand.

And then, I think you mentioned before that your premium-priced products, your volume, was down about in line with your organic volume growth, is that correct?

That's correct.

So if you looked at, like, a mix in the quarter, I guess I'm trying to understand is how the different price segments from premium, mid, and low performed.

It sounds like there wouldn't have been a major mix change in this quarter if premium was down about in line with the category -- or, I'm sorry, in line with your business, is that correct?

Yes, well, it kind of equalized out of PMI.

Yes, I mean, but of course we had a couple of markets that you are aware, like Russia, where we did see down-trading from the premium end-meet, actually, to the low-priced segment, so that actually, that down-trading trend did not deteriorate.

However, I also have to say it didn't improve yet.

Understood, sure.

Then my last question for you is in terms of the -- if you look ahead to 2010, you had mentioned in your slides about potential VAT increases and excise tax increases.

Are there any slated for right now that you're aware of for next year that we should be watching out for?

In terms of VAT increase, there is now a proposal in Spain that would bring VAT up by 2% by the middle of 2010.

So, of course, that will then require in the cigarette category an adjustment of the minimum excise tax.

You remember that around the last price increase in Spain, the Spanish government has understood that mechanism very well.

So I'm confident that they will do the necessary again.

Another example of their [use] and you have eventually seen, there are published plans out there not yet fully finalized in Russia.

The excise increases there would be somewhat higher than the ones that we have seen this year.

But, in general, I would say the rollover of those increases in 2010 would be in the range of two rubles.

If you put that into relation to the overall price level, Marlboro is retailing today at 42 rubles and L&M is retailing at 27 rubles.

So, it's a manageable situation again.

So, the one government where you never are safe to see another bad surprise is, of course, and remains Ukraine.

But there, I don't know what's happening.

And Japan is sort of a watch-off for right now.

We're not sure how that's going to play out.

We have to wait in Japan.

We, of course, make our arguments and we talk to the opinion leaders.

We advocate, as I said, for moderate and regular exercise increases.

Our Company is about pricing freedom.

I hope that we will be heard, but, as I said, there is really no official government tobacco policy out there.

We have to wait.

You know that the budget cycle of the Japanese government does not follow the calendar year, but goes from April to March.

So, beginning of next year, I think there should be more clarity on Japan.

[Teelo Reed], Credit Suisse.

Hermann, just wanted to clarify one thing.

The guidance increase that you gave today, only $0.03 of that is driven by better-than-expected currency.

Is that correct?

That's correct.

And I was a little bit surprised, though, that this quarter was the worst quarter in terms of currency impact.

Can you give us an idea of what the major currency movements were behind that big impact?

Look, I mean, let's put it this way.

You have seen the breakdown that we had forecast for the year.

Now we are essentially done, I would hope, with this negative currency for the year.

Over these three quarters, I mean the currencies that have hit us most are, of course, the Euro, but beyond the Euro, the emerging markets' currencies, first of all the ruble.

The Ukrainian Hryvnia with a severe impact in there.

These are the most prominent ones, and then thereafter will come the Turkish lira.

And then, at the beginning of the year, you explained to us that down-trading in Russia was driven by the collapse of the oil price.

Do the recent gains in the oil price change the outlook for Russia?

Is the worst over in Russia and should we get back to up-trading there if oil continues to go up?

It will certainly help Russia now.

We're talking about the Russian economy overall and not just cigarettes.

This will certainly help.

However, from there until you see really more employment, remember -- I mean, there is not only unemployment in Russia, there is also underemployment in Russia where people only work part-time and get paid, therefore, only part of the salary, and on the countryside you would find situations where people get their salaries paid late or maybe for a month not at all.

As soon as that comes back to a more normal pattern and the consumer confidence is going to come back, that is going to be the moment where you will start seeing upgrading in Russia, but let's be realistic, I don't think we will see that beginning before the second half of 2010.

Ann Gurkin, Davenport & Company.

I had a couple of things.

One, Hermann, if you'd give us an update on the outlook for tobacco lease pricing for the balance of this year and 2010?

Okay.

Lease pricing -- year to date, we have a negative lease price in our P&L of $150 million compared to last year.

So, you will have pro rata about the same effect still for the remainder of the year.

That, of course, again, is baked into our guidance for the full year.

Going forward, the crucial question remains that we achieve a balanced supply of tobacco, balanced with the demand for tobacco, and quite frankly, I think this is perfectly achievable.

Let me speak for us, I mean.

We at PMI, we know exactly how much tobacco we need for the coming year.

Our volumes don't vary that much.

So, therefore, I think as we know that, the farmers are the ones who need to have that visibility, and the farmers need to know that they can make a decent normal margin on the leaf they grow and not actually like it has been in the past, a boom one year and a loss in the next year.

So that's, directionally, how we are tackling the problem.

So, we are in the process of getting it under control.

Okay.

And then, as we look to 2010, should we expect a similar pace of new product introductions like we saw this year?

We have quite a nice pipeline developed out there.

We often talk about Marlboro.

We are also working about with the other brands.

Not every innovation is already rolled into every market.

And that, as I said, would be even wrong.

It has to be adapted to that market.

That's what we will continue to do.

And then last, any update on the potential of lifting the ban on SNUs in the EU?

Well, the ban on SNUs in the EU there, really nothing has changed.

The lifting of that ban is still a 50-50 chance.

We will have to wait and see.

Okay, so before we conclude, let me maybe add one point here.

You have seen our results of the third quarter, and the point I would really like to highlight is that, really, since being a public company, since the spin, we have consistently delivered on our constant-currency financial metrics, and we have done that even in the most difficult of economic times.

I believe that is a great achievement, and we will [go to cards] to continue to do so.

Okay.

Thank you very much for joining us today.

That concludes our investor call.

Have a great day.

The investor relations team is in Lausanne, Switzerland, and available for further questions if you need to reach us.

Again, thank you and have a great day.

Ladies and gentlemen, that concludes the Philip Morris International third-quarter 2009 earnings conference call.

We appreciate your time and attention.

You may now disconnect.